Outlook for Liquid Fuels, 2010-2020

As our regular readers know, we here at TCLocal are engaged
in a long-term effort to help develop local responses to energy
descent—the condition of decreasingly available energy. The
near-term manifestation of energy descent is high liquid fuel
prices caused by a leveling and decline in global oil production,
and it has been part of our job over the five years since we
started TCLocal to keep an eye on the liquid fuel outlook and
periodically advise the residents of Tompkins County (in
particular, local policy makers) on what we’re finding.

In September, five of us TCLocal contributors had the honor of
presenting a panel discussion on “Local Responses to Energy
Descent” at the monthly meeting of Back to Democracy in
Trumansburg. The audience heard from Katie Quinn-Jacobs on
Preparedness; Karl North on Food Production; Bethany Schroeder on
Health Care; and Tom Shelley on Energy. Articles by all of these
authors can be found elsewhere on the TCLocal.org web site (see
the list at the end of this article). It was my job to introduce
these responses to energy descent with a quick summary of the
outlook for liquid fuels. A version of that introductory
presentation serves as our TCLocal article for the months of
September and October.

The overview that follows was based on a fresh analysis of the
current situation conducted over the summer by a team consisting
of myself, Bethany Schroeder, Karl North, and Tom Shelley. Not
every detail will be agreed upon by every TCLocal contributor or
even by every member of the research team, but it does represent
in a general way a shared view of the outlook for liquid fuels
over the next decade. Illustrations drawn from the Web
are credited where the source is known and are reproduced here
under the Fair Use provisions of copyright law.

The Lesson of Deepwater Horizon

Predicting the price of oil is an extraordinarily difficult
task even for petroleum experts, which we are not, and the effect
of the economic downturn on the oil business has made reliable
forecasting almost impossible for the last couple of years. But
this summer, one thing, at least, became very clear: the easy oil
is gone. That’s not a future development; it’s already here.

U.S. Coast Guard

No one pursues a course as risky, dangerous, and expensive as
drilling four miles down into the Gulf of Mexico unless all the
easier stuff is no longer available. It doesn’t take a degree in
petroleum engineering to see this.

It is enlightening to
understand some basic facts about oil extraction, though, so if
you’d like to know more about that,
click here. You’ll be returned back to
this place when you’re done.

Here’s a recently published official view of the future from
the U.S. Department of Energy’s Energy Information Agency
(EIA).

The top line in this remarkable graph is world demand for
liquid fuels. Over the long term it always increases
steadily due to population growth, if nothing else.

The colored areas show the global sources of liquid fuels,
taking into account all currently known projects. As the graph
makes clear, existing sources of conventional oil are already in
steep decline, and unconventional sources can’t keep up with
that decline. The result is a growing gap between supply and
demand beginning not long after 2012.

In the petroleum world, this has never happened before. Up
until now, there has always been enough liquid fuel to meet
demand, because it could be pumped out as fast as people had a use
for it. A widening gap between supply and demand will eventually
have an upward effect on prices beyond anything seen so far.

The label “Unidentified Projects” in the
illustration acknowledges that no one really knows what sources
can fill this widening gap between supply and demand. It is
certain that no combination of currently foreseeable efforts can
make up for the rate of decline in conventional oil production,
and any new projects are certain to be much more expensive than
those of the past.

Red Herrings and Dead Ends

At this point, most readers will be thinking of their favorite
solution to the energy problem. But within the ten-year period
that we’re discussing here, there is no solution. No
current proposal will avert a near-term future of decreasingly
less available liquid fuel.

This conclusion may come as a shock to anyone who’s put
their faith in technological fixes. We seem to have so many
promising solutions to choose from; you’d think the problem
was just getting them implemented. There certainly is a lot we
could be doing that we aren’t, but on examination it turns
out that the proposed technological solutions to the coming oil
crunch are at best wishful thinking and at worst border on the
fraudulent.

A prime example of this latter category is the idea that we
will replace current vehicles with ones fueled by hydrogen. The
fact is that hydrogen is not a source of energy, it’s just a
way of storing energy, like batteries. And if we had the extra
energy to store, we could distribute it much more easily by
building out the existing electric grid—and much more
efficiently, too. As shown here, the pure electric approach
delivers three times the power to the road from a given input of
electricity than the hydrogen-based approach.

Bossel, Proceedings of the IEEE

Remember GM’s relentless promotion of hydrogen cars? The
last serious publicity the company put into this was in 2006.
It’s now obvious that this was all just a PR campaign
designed to reassure consumers that GM was working toward a
transition away from fossil fuels. That role is now being played
by electric cars. This is an improvement, but unfortunately not a
solution.

The proposal to solve the liquid fuels problem by transitioning
to electricity is one of a large class of putative solutions that
make some technical sense but just don’t comprehend the
scale of the problem. It’s clear that widespread conversion
to electric vehicles will require some kind of addition to our
generating capacity, but few people appreciate the size of the
change. The fact is that most people have no idea how much energy
we’re consuming to move as many vehicles around as we
do.

Let’s do a little back-of-the-envelope calculation here.
According to the EIA, total U.S. petroleum consumption in 2007 was
20,680,000 barrels per day, and 70 percent of it went to
transportation. A barrel of oil represents 1700 kWh of energy.
Do the arithmetic and you’ll find that transportation in the
U.S. uses about 9.0 billion MWh/year of energy from petroleum. By
comparison, according to the EIA, total U.S. electrical output in
2007 was about 4.2 billion MWh. In other words, the amount of
energy represented by the fuel we’re using in vehicles is
more than twice as much as the total amount of energy represented
by the electricity we’re producing each year. Speaking very
roughly, therefore, a proposal to replace half of our vehicle
fleet with electric versions amounts to a proposal to double the
size of our entire electric generating and distribution system,
which includes doubling the amount of fuel consumed (chiefly
coal). It is safe to assume that we will not see this happening
in the next ten years, if ever.

Proposals that rely on solar, wind, or nuclear to provide the
missing electricity demonstrate a similar failure to understand
the scale of the problem. The following diagram illustrates this
point.

Count off the sources by working up from the bottom of the
graph and you’ll begin to understand what a tiny proportion
of our electrical generating capacity is due to wind, solar, and
biomass; their contribution is barely visible. Electricity from
nuclear is much greater, of course, but the cost and planning
horizon of nuclear projects means that any sizable expansion of
nuclear capacity would lie many years in the future. Aside from
the inability of these sources provide liquid fuel, no believable
expansion scenario envisions any combination of them being able to
fill more than a fraction of the energy gap that’s opening
up due to the decline of conventional oil.

A third class of solutions would actually solve the liquid
fuel problem, but only for a little while, and at an enormous cost
in other resources. Hydrofracking for natural gas in our local
Marcellus shale is an example of this category of solutions: we
get a temporary shot of fossil fuel at the cost of our farms and
our drinking water, and at the end of the process we're left back
where we started but with permanent damage to our environment.

Another technology in this category is oil from “tar
sands” and “oil shales,” production of which uses
phenomenally large amounts of water and is even more destructive
to the environment than hydrofracking.

Tar sands are also representative of a class of good-looking
production technologies that don’t yield significantly more
energy than they use but simply substitute one source of energy
for another, in this case, massive amounts of natural gas to heat
the “tar” (bitumen). Another example of an energy
“source” that doesn’t actually deliver
significantly more energy than it consumes is liquid fuel from
biomass, such as ethanol from corn.

To sum up, then: some of these alternatives—in
particular, the development of solar and wind power—really
are worth pursuing, but none of the current proposals can change
the history of the next decade or so, either because they are not
solutions at all or because it is physically impossible to
increase production from alternative sources quickly enough to
have a meaningful impact in that period of time. The only thing
that could change the basic reality would be a massive, all-out
effort to replace liquid fuels with substitutes from coal or
natural gas.

Large-scale production of liquid fuels from coal has only been
accomplished twice in history, once by the Nazi government in
Germany and once by the apartheid regime in South Africa; the
synthetic fuel is of excellent quality, but the technology is
brutally expensive and therefore instituted only as a last resort.
And of course large-scale coal-to-liquids would just delay the
inflection point without really changing anything, because coal
and natural gas are themselves finite resources that are closer to
their own peaks than most people realize.

Coal-to-liquids shares one more flaw with most of the other
proposed solutions: we’re out of time. A 2005 study
commissioned by the U.S. Department of Energy concluded that
widespread disruption to our economic system from peak oil could
be averted by nothing less than a WW2-level national mobilization
effort to implement coal-to-liquids starting at least a
decade ahead of the peak—and we don’t have that kind
of time left.

Timing the Gap

The inevitability of a coming liquid fuel price crisis caused
by failure of oil production to meet increasing demand is much
easier to establish than the precise timing of that crisis. But
this year several independent studies have arrived from different
directions at approximately the same conclusion.

In “The Status of Conventional World Oil Reserves,”
published recently in the journal Energy Policy,
researchers Owen, Interwildi, and King conducted an in-depth
survey of all currently available information regarding oil
production and petroleum reserves, with special attention to the
reliability of reporting in the OPEC countries. Their
conclusion:

Supply and demand is likely to diverge between
2010 and 2015, unless demand falls in parallel with supply
constrained induced recession.

Note the “unless”; we’ll return to that
shortly.

In the article “Forecasting World Crude Oil Production
Using Multicyclic Hubbert Model,” published last April in
Energy & Fuels 2010, a team from Kuwait University
(Nashawi, Malallah, and Al-Bisharah) performed an in-depth
mathematical analysis of the 47 leading oil-producing countries.
While based on a methodology completely different from that used
by Interwildi et al., their findings are strikingly
similar:

World oil reserves are being depleted at an annual
rate of 2.1%.... World production is estimated to peak in
2014....

A third independent study is notable for its source: the United
States Joint Command (that is, the U.S. military establishment).
Their official public assessment of the current situation,
published last February in Joint Operating Environment
2010, is short on detail but very clear:

By 2012, surplus oil production capacity could
entirely disappear, and as early as 2015, the shortfall in
output could reach nearly 10 MBD.

Ten million barrels per day (MBD) is about 12 percent of
current global oil production. A shortfall of that magnitude
would have an effect on fuel prices that’s difficult to
fully imagine.

The mainstream business press has until recently been notably
dismissive of such estimates, regardless of the credibility of
their sources (how can you dismiss the entire U.S. military?).
But in September, Forbes, which bills itself as the
“capitalist tool,” broke the wall of denial in an
interview with respected oil analyst and oil industry veteran
Charles Maxwell (nicknamed “the Dean of Oil
Analysts”). Maxwell said:

A bind is clearly coming. We think that the peak in
production will actually occur in the period 2015 to 2020. And if
I had to pick a particular year, I might use 2017 or 2018. That
would suggest that around 2015, we will hit a near-plateau of
production around the world, and we will hold it for maybe
four or five years. On the other side of that plateau, production
will begin slowly moving down. By 2020, we should be headed in
a downward direction for oil output in the world each year
instead of an upward direction, as we are today.

As might be expected, the estimate in Forbes is the most
conservative of the forecasts quoted here, but even it clearly
sees a fundamental change in the liquid fuels supply before the
end of the decade.

These are just the most recent in a series of warnings by
eminently credible sources dating back to 2004. For some earlier
quotes, click
here.

Now let’s take another look at that first study. It says that
supply and demand are likely to diverge between 2010 and 2015,
unless demand falls in parallel with supply constrained induced
recession. In other words, this forecast, like the rest, is
based on the assumption that the economy stays healthy,
because (as just happened) an economic downturn reduces the demand
for liquid fuels. So we can sum up all four of these recent
analyses in one conclusion:

IF the economy stays healthy, THEN
supply shortages or very high prices will begin to develop before
the end of this decade, probably some time between 2012 and
2015.

In forecasting the timing, therefore, the operative question
is, How likely is it that the economy will stay healthy?
And the answer is, Not very. This is because fuel prices
and the economy have become deeply interdependent. Just as a bad
economy causes fuel prices to fall (as we saw in 2008), so high
fuel prices cause the economy to fall. An often cited threshold
is $85 per barrel, above which the price of fuel has a damaging
effect on the economy. Our current economic downturn was about
bad credit and a real estate bubble, but some analysts suspect
that the first card to be pulled out of the house of cards was the
spike in oil prices that briefly drove crude to $145 a barrel.

Instead of the steady decline shown in the EIA graph, we
may see a period of boom-and-bust cycles where a rising economy
causes a rise in fuel prices followed by an economic downturn and
falling fuel prices. If this happens, the point at which global
demand permanently exceeds global supply may, contrary to all the
estimates quoted above, be pushed clear into the next decade.
But this does not affect the basic finding that, as a society,
we will soon use much less liquid fuel, for several
reasons.

First, from here on out, both sides of the boom-and-bust cycle
limit the amount of fuel we will be consuming on average. Either
we will be employed but unable to afford the high fuel prices
associated with a good economy, or we will have lower fuel prices
in an economic downturn but be unable to buy any because we’re
unemployed.

Second is the fact that the U.S. imports most of its oil. So
for us, the question is not how much oil is being produced
globally, but how much of it is available for import. And from
this viewpoint, the picture looks very dark indeed. All the big
oil exporting countries have internal development needs to meet at
the same time that almost all of them are producing less oil every
year. The combination of increasing internal consumption and
decreasing oil production can very quickly send exports from a
given country to zero.

A third factor that guarantees less fuel available to us in the
future is China’s quiet acquisition of long-term contracts
with major oil producers, which will take a lot of oil out of the
open market we’ve been depending on to supply our needs.

Finally, the notion that the global economic cycle will be
driven by our national vicissitudes is based on the assumption
that the world economy depends on the U.S. economy. That’s
been true till now, but the moment the Chinese realize that
instead of lending us money to buy their products, they can lend
themselves the money to buy their products, we fall out of the
picture, and at that point we may well find ourselves with a
decreasing ability to pay for fuel that is becoming increasingly
expensive, with prices driven upward by an Asian economic
expansion that has decided to go on without us.

A Dangerous Situation

The more we consider the dependence of our economy on cheap
fuel, the more fragile it appears. Everything about the American
economy is based on the assumption that growth is inevitable;
indeed, compound interest itself—the bedrock of our
financial system—is based on this concept insofar as it
represents actual growth and not just inflation. Take that growth
away, and the whole thing collapses, as we saw when real estate
prices stopped increasing.

The unprecedented disappearance of spare liquid fuel production
capacity makes the system highly vulnerable to interruptions in
supply, as diagrammed here by TCLocal contributor Karl North; a
problem with oil production (far left) can set in motion a set of
feedback loops that brings down the entire economic system. From
this perspective, our current situation is actually rather
precarious.

While it’s devoutly to be hoped that we can get past the
inflection point of oil production with our society more or less
intact, no one should underestimate the downside potential of this
development. Another recent objective analysis, this one carried
out by the German Army (the Bundeswehr), summed up the consequences
of declining oil production for their country this way:

Investment will decline and debt service will be
challenged, leading to a crash in financial markets, accompanied
by a loss of trust in currencies and a break-up of value and
supply chains—because trade is no longer possible. This would in
turn lead to the collapse of economies, mass unemployment,
government defaults and infrastructure breakdowns, ultimately
followed by famines and total system collapse.

There is no reason to believe that the potential damage we
could be facing here in the U.S. would be any less than in
Germany, which is one of the richest and most advanced countries
in the world and one that has put far more effort into
transitioning to alternative energy than we have.

The Outlook for This Decade

These considerations lead to the conclusion that the watchword
for the coming decade is instability. We will probably
cycle between economic hardship and high fuel prices for a while,
and this cycle will militate against constructive responses. When
the economy is bad, we won’t have the money to spend on
sensible measures like alternative energy and mass transit, and
when it starts to recover, we’ll tell ourselves that the
problem was temporary and that we’ll soon be back to
business as usual. It’s an old story: when the roof leaks,
it’s raining too hard to fix it, and when it stops raining,
a fix isn’t needed…until the whole thing comes down on
our heads.

As murky as the future appears, however, some things are fairly
easy to predict. Here is a list of things that will probably have
occurred, or at least be starting to occur, by the end of this
decade.

Liquid fuels and energy in general will be more
expensive. This one’s easy. Even if we could keep expanding
oil production (which no one who has looked into it believes),
that oil will become increasingly more expensive to extract as we
are forced to look farther out into the ocean for it.

Less fuel will be available to use. This is another easy
call; either fuel will be too expensive, or we won’t be in a
position to buy as much as we used to.

We will have begun to stay closer to home. This is
already happening. Another way to put it is that life will become
more local.

Supply chains will have begun to contract. This is another
direct consequence of rising fuel prices. The distance that goods
travel to market became noticeably shorter in just the few months
during which we experienced the last price spike. Consequences
include a shift back to more local production.

Food (as a percentage of income) will be increasingly
expensive. Yet another direct consequence of the increasing
price of fuel, which is used in enormous quantities both to
produce food and to transport it over long distances. Farm land
will increase in value, and farm employment will rise as manual
labor begins to replace energy provided by liquid fuels.

We may begin to see occasional interruptions in some
services (electricity, water, sewer, internet, etc.). This one
is not as obvious as the preceding, as none of these services are
directly impacted by the price of liquid fuels; but huge
quantities of liquid fuel are consumed in maintaining all
of these service infrastructures, and rising fuel prices will
probably result in deferred maintenance and a possible consequent
lack of reliability. I don’t think this is likely before the end
of the decade, but it’s certainly a possibility, and one that
should be planned for.

Rationing of fuel and perhaps even food is possible by the
end of the decade. Rationing would demonstrate real
sensitivity for the social justice aspects of the situation, so I
don’t expect to see it happening any time soon, but it’s a
possibility.

Some broader developments are simply continuations of current
trends that will be accelerated by high fuel prices and their
effect on the overall economy.

Our standard of living will continue to fall.
U.S. household income in real dollars peaked in 1998-1999 and has
been declining ever since. There’s no reason to believe that this
trend will be reversed.

Fewer financial resources will be available to
government. This is another development that’s already
underway, and it means that most meaningful responses will have to
come from individual efforts or self-organized community action.

Providing health care for all will be increasingly
difficult. Responses include better health education, free
clinics, citizen involvement in county public health advisory
boards, and the assumption of greater responsibility for
maintaining our own health.

Military conflict over resources will become increasingly
likely. Which is, of course, why the U.S. Joint Command is so
interested in our energy outlook!

Final Thoughts

Three observations come out of all this.

The first half of the decade (2010-2015) looks better
than the second half (2016-2020). If you have any major
projects in mind, this might be a good time to get going. In
particular, this would be a good time to make infrastructure
improvements, establish a garden, and move closer to work (or
arrange to work closer to home).

The developments listed above as possible by 2020 are
virtually certain by 2030. The descent doesn’t stop until
we’ve achieved a state of equilibrium with a much lower
level of resource exploitation. That transition can be easier or
harder depending on how we approach it.

A lot of these developments can be prepared for. And
that is the purpose of TCLocal: to begin to plan for the future
looming on the near horizon. We hope that the foregoing gives the
context for our effort and that the articles we’ve published
here are helping us begin to confront and plan for the challenges
facing us over the coming decade. The following list provides
links to all the articles we’ve published so far.

Great article. I hope you are connected with the Transition people, as they are a great resource and doing just what you are nationally and globally. We are one big Transition family! www.transitionwhatcom.ning.com

I agree with Kate that this is a great article. But I hope that TCLocal is NOT "connected with the Transition people" in any way that blurs the distinct difference in approach. Your work includes rigorous analysis, and urgent projections with short timelines. So it lends itself to meaningful preparations, but not to an upbeat, easily marketed story. I wish you guys were here on Vancouver Island.

Some time in the next 30 years, life will start to become very different from what it is now. By mid-century we will use much less energy; we will live every aspect of our life much closer to home; and we will be much poorer in material terms, because energy and wealth are basically the same thing in an industrial society.

Energy descent — a radical reduction in our use of energy — is certain, but it’s not clear yet which of several factors will cause it to begin. Perhaps we will decide to do the right thing about climate change and reduce our CO2 emissions 80 or 90 percent, which would require changes almost that large in our actual consumption of energy. And there are other ways we might experience a radical reduction in our use of energy; for example, economic collapse, or an expanded war in the middle east. But the factor that makes energy descent a sure thing and sets the theme for this century is "peak oil" — the leveling off of global oil production and then its eventual and inexorable decline.

The timing of the peak is debatable, with forecasts ranging from 2005 (that is, already here) to 2030. But most credible estimates agree with the U.S. Army Corps of Engineers, which concluded in a recent study that "world oil production is at or near its peak," and with the director of research at OPEC, who said recently that "we are at, or near, the production peak of world oil, if not on the downward slope."

After the peak, the growing gap between falling world oil production and ever-increasing global demand will send prices skyward, with economic results that can only be imagined but will certainly include greatly restricted mobility due to the high cost of fuel and much higher prices for most goods, including food. The result will be less disposable income, a life lived closer to home, and a greater reliance on the goods and services that can be provided locally. Since the supply of oil and other fossil fuels is finite, this outcome is guaranteed. The only question is, Shall we plan for what we can see coming, or just let it happen to us?

A group of area citizens, TCLocal, has begun planning now. TCLocal contributors are committed to researching various aspects of energy descent in Tompkins County and writing up a preliminary plan for each aspect based on purely local challenges and resources. This is one such plan.